During the housing boom, many investment properties were purchased to increase income and build portfolios. Now, many of these properties are underwater and no longer producing income as tenants struggle to pay rents. If you’re an individual investor in a similar situation and you’re wondering what to do with your investment property portfolio, consider the benefit of what is called a “cramdown” of those mortgages under Chapter 11 of the Bankruptcy Code.
Secured loans may be modified under Chapter 11. Professor Jonathan Hayes writes in his book, A Summary of Bankruptcy Law, “In general, secured creditors must be paid in full with reasonable interest for a reasonable amount of time. Section 1129(b)(2)(A). In full means the total amount owed, or the value of the collateral if that is less than the amount owed.” This means that, “a high interest, short term loan may be rewritten to reasonable interest for a period of years,” say Hayes. However, a loan secured solely by the debtor’s home many not be adjusted pursuant to 1123(b)(5).
What this means is that you can “cramdown” the amount you owe on these investment property mortgages to the current market value. This will restructure the debt to an affordable level and allow the potential rental income to support this lower payment.